Free Zone Persons
[Based on the Public Consultation Document released by the Ministry of Finance, UAE on 28 April 2022.]
Companies and branches that are registered in a Free Zone (hereafter referred to as “Free Zone Persons”) will be within the scope of the UAE Corporate Tax and subject to tax return filing requirements. The UAE Corporate Tax regime has committed to honor the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements.
The taxability of income earned by various free zone persons from businesses within and outside the free zone is tabulated hereunder for the ease of understanding
| No | Type of transactions | UAE CT Rate |
|---|
| 1 | Transaction from Free Zone to the business located outside the UAE | 0% |
| 2 | Trading from a Free zone to the same Free Zone [within the same Free Zone] | 0% |
| 3 | Trading from a Free zone to any other Free Zone | 0% |
| 4 | Income from certain regulated financial services directed at foreign markets. | 0% |
| 5 | Branch of Free Zone entity in mainland UAE | On mainland sourced income - Regular CT rates (say 9%) Other than Mainland Sourced Income – 0% |
| 6 | Free Zone Person which doesn't have a branch in Mainland - Passive Income from the transactions with the mainland entity | Passive income* – 0% |
| 7 | Income for a Free Zone company from transactions with the Group Companies located in the mainland UAE | 0%** |
| 8 | Free Zone person located in a designated zone and sells goods to the UAE mainland business, who is the importer of those goods on records | 0% |
| 9 | Any other mainland source of income earned by the Free Zone Person | Disqualify from 0% CT for all income |
| 10 | Free Zone person has PE [ Permanent Establishment] in the mainland UAE | Regular CT rates (say 9%)*** |
Our comments:
- Maintain adequate substance – whether the conditions for adequate substance would be the same as mentioned in the ESR Regulations or whether there will be any further relief given.
- There is specific mention that the trading transactions between two Free Zones or within the same Free Zone are allowed for a 0% Corporate Tax rate. However, there is no mention of taxability on the services rendered within the same Free Zone or from one Free Zone to another. Accordingly, it is uncertain whether it is an indication that services rendered by one Free Zone entity to the same Free Zone person or other Free Zone person would disqualify for tax holiday.
- The implications in the hands of an offshore company receiving any income from mainland (eg. rent from real-estate owned by the offshore entity) have not been particularly clarified and therefore whether they will have same implications as other free zone entities, including the PE concept would be required to be looked into.
- Transactions between group companies and Free Zone entity would not disqualify Free Zone entity from the tax holiday. Whether the group company means the same as defined for the purpose of transfer of losses (75% common ownership) or there would be other criteria for the same is to be looked out for.
- The implications on MNEs located in Free Zone will have to be reviewed once the Pillar Two Regulations are embedded in the UAE Corporate Tax.
- Mainland branch of Free Zone person shall be taxed on its mainland Sourced income. The payments made by mainland branch of Free Zone person would be allowed as deductible expenditure for the branch. However, if the payment is done by group company to its Free Zone group company, the same shall not be allowed as deductible expense. Whether “payment” would mean payment for expenses alone or for cost of goods as well? This would trigger restructuring of the groups having business in Free Zone and mainland. Also, mainland branch may be required to maintain separate accounts to substantiate its income offered to tax.
